Thomas Piketty traces widening inequality in rich countries since the early 1970s to increasing shares of income claimed by the top 1%. This trend is decomposed into the increasing share of income accruing to capital ownership, and the increasing share of labor income claimed by corporate executives and financiers. Piketty shows that the increasing share of labor income claimed by the top 1% is neither deserved nor economically useful, in the sense of stimulating better products and services, increasing economic growth, or providing other benefits to the 99%. Because he defines r, the return on capital, as the pure return to passive ownership (excluding returns to capital that could be traced to entrepreneurial activity or business judgment), it is evident that capital’s share of income is also undeserved. But is it economically useful? Piketty misses an opportunity to connect his analysis to a critique of the ideology and associated politics that have driven increasing inequality since the early 1970s. While he rightly claims that the distribution of income and wealth is a deeply political matter, and connects increasing economic inequality to the increasing political clout of the top 1%, he does not identify political decisions, other than cuts in marginal tax rates on top incomes, that lie behind inequality trends. Filling in the ideological and political stories gives us some clues as to policy instruments, other than the tax code, needed to reverse the ominous trends he documents.
On the ideological front, several theories served to rationalized policy shifts in favor of increasing capital shares and top labor incomes. The stagflation of the 1970s was successfully blamed on Keynesian economics, fiscal irresponsibility, a bloated welfare state, militant labor unions, state regulation of the economy, and supposedly incentive-destroying high marginal tax rates on capital incomes and the rich. At the same time, the ideology of maximizing shareholder value took hold. Corporate executives who formerly lived merely like an especially comfortable middle class, and who gained prestige from sharing rents widely among corporate stakeholders, narrowed their focus to serving capital interests exclusively, and obtained compensation packages that tied their fates to that goal alone.
All of this might have made sense were it true that the only way to increase profits is to do things that add net value to the economy in which everyone else claims shares. But that’s the hard way to increase capital’s share of income, and thereby the income of top executives. It’s much easier for the top 1% to make money by creating and exploiting opportunities to gain at the expense of everyone else. Under the guise of ‘free’ markets, what was created was an alternative set of rules and practices rigged to serve capital owners and executives at the expense of ordinary workers, retirees, and young people. Let us count the ways.
IP monopolies have been strengthened worldwide. So-called ‘free’ trade deals have replaced labor-protecting tariffs with steeply increased capital-protecting IP regulations. Copyright terms have been extended far beyond any credible incentive effects.
Central banks across the OECD have practiced austerity, or failed to make unemployment reduction a priority, thereby gratuitously increasing unemployment to serve capital interests. Fiscal policy, too, has kept demand for labor weak, even while profits have soared. That r>g is due in part to g-depressing monetary and fiscal policies.
Laws and regulations regarding credit and bankruptcy have been rewritten to favor creditors. In the U.S., bankruptcy no longer fully discharges personal debts for many people. Millions of college students in the U.S. labor under mountains of undischargeable student debt. Usurious payday and title loans reinforce the cycle of poverty for more millions. Many creditors’ business models are predatory, in which profits are generated by terms that trap people into spirals of debt, default, and accumulating fines and fees, and are deliberately designed to prevent people from paying off the loan, so they must pay interest and fees for a longer period. Regulators failed to reduce the principal owed on home loans after the financial crisis, gratuitously extending the length of the recession. In the EU, too, German-led monetary policy has strongly favored creditors over debtors, leading to recession and mass unemployment in the peripheral Eurozone countries.
Antitrust enforcement has weakened, increasing the dominance of big firms that exploit their market power, fattening profits and executive compensation.
Financial deregulation has driven capital away from growth-supporting investment, toward speculative trading that increases financial instability. It has also led to a diversion of talent and energy into negative value-added activities such as high-frequency trading, frontrunning, and LIBOR manipulation. The rise of banks ‘too big to fail’ has led to a culture of impunity and lawlessness in the financial industry. Notwithstanding massive fraud in the mortgage industry and serial criminality on the part of major banks such as J. P. Morgan, virtually no guilty bankers have been prosecuted for their roles in the financial crisis, and fines capture only a small fraction of profits from illegal dealings. All of this has increased inequality.
On the labor side, in the U.S., basic employment laws are unenforced or carry penalties too low to deter, leading to massive wage and tip theft, forced work off the clock, and numerous other violations, especially at the low end of the wage scale. Employees are routinely misclassified as independent contractors, as a way to escape requirements to provide benefits, pay social insurance taxes, and fob business expenses onto workers. Young workers performing useful services for their employees are routinely misclassified as interns, so they don’t have to be paid at all.
The rise of contingent and temporary labor and labor subcontracting has also enabled corporations to shed responsibilities for providing decent pay, benefits, and working conditions–a pure shift of income from labor to capital (or, for nonprofits such as universities, a pure shift of income from contingent workers such as adjunct faculty to the pockets of top-level administrators). Franchising performs similar functions, whereby the franchisor imposes costs and pricing structures on individual franchisees that all-but-guarantee that the latter cannot clear a profit without violating labor laws. Outsourcing abroad, including to enterprises that exploit forced and defrauded workers, magnifies these problems. These practices are due to a failure of employment law to close loopholes that empower firms to pretend that their employees are someone else’s responsibility.
U.S. law has systematically failed to protect workers’ contractual pension rights. During stock booms, firms are permitted to skim supposedly excess profits in their pension funds for distribution to shareholders. In the inevitable bear market that follows, they dump now severely underfunded pension funds as hopelessly insolvent. Public pensions, too, have been underfunded or raided for decades.
The shift from defined-benefit pensions to defined-contribution retirement plans has put the onus on naive investors to invest their savings. Yet financial advisors are free to peddle high-fee low-return investments to them, pretending to act in their interests, leading to returns on 401(k) plans for the ordinary investor that are well below r. While regulations have been proposed to end this practice in the U.S., its prevalence represents a pure shift of income and wealth from labor to capital, and from ordinary workers to high-paid financiers.
In the U.S., labor laws protecting the right to organize have been violated with impunity at least since the 1980s. The decline of labor unions, in turn, has led to a decline in labor’s political influence for all policies affecting workers, whether they are unionized or not.
In the U.S., the minimum wage has not kept up with inflation. Without the backstop of a minimum wage, much of the incidence of publicly provided benefits to low-wage workers, such as food stamps and the earned-income tax credit, accrues to major corporations, who don’t have to pay as high wages to induce the same labor supply.
From an ideological point of view, much of this can and has been peddled to the public as ‘free’ markets and ‘deregulation.’ The reality exposes the vacuity of these very ideas. In any advanced economy, the state must be involved in promulgating the constitutive rules of the economy. It can no more get out of the business of regulating the economy than the Commissioner of Baseball can get out of the business of promulgating the rules of Major League Baseball. The only real question is, in whose interests are the rules designed?
Ideology matters for politics. Once people have acquired income or wealth through the market, they feel strongly entitled to it. In the U.S. and increasingly in the rest of the OECD, the population at large, taken in by such representations, is reluctant to tax. Redistributing income and wealth by means of taxation, as Piketty proposes, becomes harder once people have it in their hands. We need to scrutinize the rules by which income and wealth get generated through the market, before it is taxed. They have been changing in a plutocratic direction for the past 45 years. The rule changes have not only increased r (at least for the top 1%), but also depressed g, by increasing monopoly power, shifting savings from real investment to speculation and scams, shifting top talent from production to value-extraction, and depressing aggregate demand.
Getting this story out is critical to changing politics. For plutocracy still must nod to what we might call ‘weak’ Rawlsianism: that inequality cannot be justified without showing that it delivers some benefits to the 99%. (It’s not for nothing that one of the leading arms of plutocracy is called the Club for Growth.) Exposing the ways the game is rigged, as Elizabeth Warren has been doing, should open more levers to change than focusing on taxes alone–levers that should also help limit the pace of increasing inequality by raising g.